Phillip? Witt, president of Witt Input? Devices, wishes to create a portfolio of
ID: 333975 • Letter: P
Question
Phillip? Witt, president of Witt Input? Devices, wishes to create a portfolio of local suppliers for his new line of keyboards. Suppose that Phillip is willing to use one local supplier and up to two more located in other territories within the country. This would reduce the probability of a? "super-event" that might shut down all suppliers at the same time at least 2 weeks to 0.3?%, but due to increased distance the annual costs for managing each of the distant suppliers would be ?$24 000 ?(still ?$16000 for the local? supplier). A total shutdown would cost the company approximately ?$450000. He estimates the? "unique-event" risk for any of the suppliers to be 4?%. Assuming that the local supplier would be the first one? chosen, how many suppliers should Witt Input Devices? use?
Find the EMV for alternatives using? 1, 2, or 3 suppliers.
Based on the EMV? value, the best choice is to use.
Explanation / Answer
The probability of disruption in case of 1,2 or 3 suppliers = Probability of super event + (1-probability of super event) * Probability of unique event risk
One supplier, P1 = 0.003 + (1-0.003) * 0.04 = 0.0428
Two supplier , P2 = 0.003 + (1-0.003) * 0.04^2 = 0.0045952
Three supplier , P3 = 0.003 + (1-0.003) * 0.04^3 = 0.0030638
EMV 1 supplier = Probability of no disrupiton * Total cost of managing supplier + Probability of disruption * (Total cost of managing supplier + Total cost of risk)
Total cost of managing supplier 1 supplier = 16000 , | 2 suppliers = 16000 + 24000 = 40000 | 3 suppliers = 16000 + 24000 *2 = 64000
= (1-P1) * 16000 + P1 * (16000 + 450000) = 0.95712*16000 + 0.04288* 466000 = $35,296
EMV 2 suppliers = (1-P2) * 40000 + P2 * (40000 + 450000) = $42,067
EMV 3 suppliers = (1-P3) * 64000 + P3 * (64000 + 450000) = $65,378
We can go with one supplier as it is least cost.